Sticky consumer sentiments could spoil recovery

Consumer sentiments are turning out to be very sticky at the low levels they fell to after the lockdown was imposed in April 2020. Most economic indices have bounced back to the prelockdown levels or close to those levels. But, consumer sentiments refuse to spring back. The lockdowns seem to have delivered a knock-out punch here.

CMIE’S index of consumer sentiments in July 2021 was 45 per cent lower than in March 2020. The despair reflected by this steep fall cuts across rural and urban regions. Rural sentiments were down by 44 per cent and urban had tanked much more, by 48 per cent. This is in sharp contrast to the recovery seen in most other economic indicators, including labour participation and employment generated from the same household survey conducted by CMIE. Employment in July was 0.9 per cent higher than in March 2020. Jobs are back but sentiments doggedly refuse to improve.

The Reserve Bank of India (RBI) also produces a consumer sentiments index. Its sample selection and methodology are different from that of CMIE’S Consumer Pyramids Household Survey. Even this completely different survey comes to a conclusion very similar to CMIE’S consumer sentiment index.

RBI’S Current Situation Index in July 2021 was 43 per cent lower than in March 2020. RBI’S sample is limited to a few urban centres. Nevertheless, it reflects the same apprehension of households with respect to their well-being.

Consumer sentiments have been hit by the lockdowns, which were a reaction to the Covid-19 pandemic, which was a global phenomenon. Ergo, other countries have suffered a fall in consumer sentiments as well. But, the fall has not been as severe or as prolonged as in India. The Index of Consumer Sentiments in July 2021 for the US, for example, was 9 per cent lower than in March 2020 against India’s 45 per cent fall. The US index never fell more than 30 per cent, while the Indian index fell almost 60 per cent compared to pre-lockdown times. The US index is produced by the Surveys of Consumers at the University of Michigan. CMIE’S consumer sentiment indices are based on the same methodology.

Indian consumer sentiments have been improving in August 2021. The 30-day moving average of the index as of August 29 was 2 per cent higher than it was at the end of July 2021. The index deteriorated in the first fortnight of August but has since recovered. The 2 per cent increase in the Index of Consumer Sentiments is welcome as it comes on top of a 10.7 per cent increase recorded in July 2021. Even after these two consecutive months of improvement, sentiments would still be 44 per cent lower than in March 2020.

The persistence of poor consumer sentiments has ramifications on the sustainability of India’s recovery from the sharp fall in 2020-21. Real GDP had shrunk by 7.3 per cent in the year. There are expectations of a recovery in 2021-22. Persistently low consumer sentiments pose a challenge to this recovery. Consumer sentiments reflect perceptions of households regarding their current and prospective incomes and their propensity to buy consumer durables. If these perceptions continue to remain highly subdued, households will not be willing to spend. This will curtail the growth of private final consumption expenditure, which accounts for more than half (about 56 per cent) of GDP.

Average household incomes had fallen by 14.9 per cent in nominal terms during 2020-21. In real terms, after adjusting for the over 6 per cent inflation in the year, the real fall in average household incomes was a hefty 20 per cent.

It is not easy to repair the damage done by such a sharp fall in household incomes. Academics using CMIE’S Consumer Pyramids Household Survey have shown that people who lost jobs moved to lower-paying ones. This explains the fact that while employment came back, income did not.

All this was in 2020-21 — before India was hit by the second wave in April-june 2021, which is likely to have hit household incomes further. A fall in real household incomes hurts the purchasing power of households. But, a fall in nominal income has a lasting impact, besides curtailing purchasing power.

In the week ended August 29, 43 per cent of households reported that their income was worse than a year ago. This is in nominal terms. Further, 41.5 per cent of the households expected their incomes to worsen over the next 12 months. This 41.5 per cent is unlikely to spend enthusiastically. Another 50 per cent or so who do not expect their incomes to improve are also unlikely to spend enthusiastically. This endangers the growth of private final consumption expenditure, which in turn threatens the recovery process of 2021-22.

In the last normal year, 2019-20, only 9.3 per cent of the households expected their incomes to worsen in the next 12 months. The “next 12 months” turned out to be much worse than their worst expectations. The lasting impact of that experience is evident in 2021-22. Even after 37 per cent of India’s population received at least one shot of the vaccine, its households remained sceptical of a return to prosperity.